July 2018 Market Summary
International cotton prices moved higher in July. The end of the month saw the disappearance of the 2017/18 Cotlook A Index, whose low point of 77.40 cents per lb occurred as early as mid-August 2017, and which hit its peak of 101.70 in June 2018. In late May, the Index crossed the threshold of one dollar per lb for the first time in more than six years. At 87.99 cents per lb, the season’s average is the highest since 2013/14 (90.57).
Under the Dual Index System, a new Forward Index (shipment no earlier than October/November 2019) will be introduced after the turn of the year, as soon as sufficient market evidence is available.
The politics of international trade continued to influence market sentiment in July and the ‘trade war’ between China and the US rumbled on. On July 6, confirmation was received that both countries had made good on threats to introduce additional tariffs of 25 percent on a range of import products (including US cotton entering China), which perhaps counterintuitively prompted a sharp rally in New York. Barely a week later, however, Washington announced the intention to impose duty on a new raft of goods. Clarity with regards to the level of duty (initially mooted at 10 percent, but with the potential to be introduced at 25 percent following allusions from the White House) is still awaited. A hearing is scheduled in the US during August and a final decision will be released by the end of that month.
Market reaction was more muted as the month wore on, aided by a realisation that several options exist to avoid the extra tariffs; Chinese spinners in receipt of ‘Processing Trade’ import quota will have any duty refunded if the final products is exported and mills in Free Trade Zones are thought to be exempt. Washington announced late in the period that US$12 billion had been earmarked to mitigate the effects of retaliatory tariffs on US agriculture.
US cotton continued to sell at a good pace, with commitments of all cotton for shipment in 2018/19 placed on July 26 at over 6.9 million statistical bales (480 lbs). Vietnam was consistently the largest destination during July, accounting for over 44 percent of the total during the month. Sales to China unsurprisingly became far less prominent during the period, but neither were cancellations witnessed on any significant scale. It appears likely that Chinese companies owning enterprises in Vietnam will utilise those mills and subsequently import cotton yarn, providing a further opportunity to avoid punitive import tariffs. USDA’s export forecast for the 2018/19 season is currently placed at 15 million bales, a volume which, if sales continue at their recent pace, would be exceeded.
Elsewhere, physical trade was sluggish, in the face of high prices and the gap in supply which often materialises in the Northern Hemisphere summer months. The current level of raw replacement costs proved difficult for mills to absorb and those in need of cover tended to focus on lots that were discounted on quality considerations. For the most part, however, spinners with sufficient stocks appear to be anticipating the arrival of new crop cotton, and the accompanying downward trajectory of prices that heavier supply is expected to elicit.
Daily turnover on China’s State Reserve auctions recovered from the reduced rate in evidence during June, prompted by firm international prices and the uncertainty arising from US trade tariffs. By the end of July, cumulative purchases since the beginning of March had reduced the volume of stocks by some 1.8 million tonnes. Late in the month, Beijing confirmed that the auction series will be extended to the end of September (as happened in the previous two years), by which time the arrival of the new crop, although slightly delayed by hot weather in the major growing region Xinjiang, will be around the corner. Hence, the supply situation in China appears ample for the coming months. However, the market continues to anticipate the juncture at which China’s import requirements will increase to meet the country’s structural deficit; should auction sales continue at a similar pace, the volume in State Reserve warehouses by the end of the current auction series is expected to be little more than one third of a year’s domestic consumption requirements.
On the global production front, attention remained focused on the US, where plants have suffered from extremely high temperatures and sustained drought in the main producing region, West Texas. Abandonment is expected to be high and yields to be impacted. Cotlook’s estimate was reduced considerably, to 4.085 million tonnes, a reduction of 10 percent on the current season. USDA’s domestic production forecast was also adjusted lower in July, by a million bales, to 18.5 million (4.028 million tonnes). The August figure will be keenly awaited, as the first of the season based on actual field surveys.
Elsewhere, few changes were registered to Cotlook’s production figures. Our estimate of global output was lowered to 25,863,000 tonnes, from 25,994,000 put forward a month earlier. Consumption meanwhile was pitched higher at 26,931,000, primarily owing to growth in major consuming markets, including Vietnam and Bangladesh.
The above changes continue to imply a reduction to stock levels inside China, of some 1,050,000 tonnes. For the first time, a decrease is also in prospect in the rest of the world at the end of 2018/19, of just 18,000 tonnes, influenced in part by China’s rising import requirements.